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Bitcoin: Why the IRS cares about an intangible currency

On behalf of Frost & Associates, LLC posted in IRS on Thursday, August 29, 2013.

You probably are among the vast majority of people who have never used it. But perhaps you have heard about it. And you can be sure that you will be hearing more about it going forward.

We're talking about a Bitcoin. And the reason it's sure to be garnering a lot more public attention is that it is already starting to get scrutiny from top lawmakers in Washington, D.C.

As evidence, we point to the fact that leaders of the Senate's Homeland Security and Governmental Affairs Committee let government financial regulators and enforcers to make clear how they intend to track what's happening with Bitcoin and other virtual currencies that are developing in the Internet realm.

If tracking is here, you can be sure that tax collection by the Internal Revenue Service will follow, highlighted by stressful IRS action requiring effective solutions from experienced legal counsel. For the uninitiated, here's a little glimpse into the Bitcoin world.

By now you grasp that a Bitcoin is virtual currency. That is, it exists only as a code on a computer, but it works like cash. It can be used to buy products and services. It got its start back in 2009 in the midst of the Great Recession when everyone was asking whether anything was worth anything anymore.

Today, a Bitcoin market worth $1.2 billion exists and that’s what has officials worried. To tap into the market, a buyer has to buy a Bitcoin with real currency. Once that cash enters the virtual world, though, it becomes unregulated. And that's where state and federal regulators get worried, because that means Bitcoins might be used to launder money, sell illegal products, commit fraud or evade taxes.

The Securities and Exchange Commission is already conducting an investigation into an alleged Bitcoin Ponzi scheme. The General Accountability Office has also suggested to the IRS that it develop guidance on how taxpayers should go about reporting their digital currency holdings.

Backers of the Bitcoin market don't necessarily object to regulation, but they say the market is at such an early stage of development that they worry that ham-fisted oversight might squash it before it has a chance to take hold.

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